The Stock Market’s Bipolar Cousin

By Fleming Meeks

SINCE THE MARKET BOTTOMED in March, shares of (ticker: TIF) have gained a sparkling 136%, to $40.61 at yesterday’s close. That’s more than double the gain of the Dow Jones Total Stock Market index. As we pointed out in a bullish Alert in February, when Tiffany’s shares were $20.75, the stock has consistently posted higher highs and lower lows than the broad market over the past decade. We thought the dark mood hanging over the iconic jeweler was excessively pessimistic.

That mood has reversed dramatically. Tiffany’s 96% gain since our February Alert is more than triple that of the market over the same period. We think it’s time to take your money off the table.

During the 2008 holiday season, Tiffany’s worldwide sales fell 21%. U.S. retail sales were down 33%. Same store sales were even worse.

The bad news has yet to abate, though analysts expect year-over-year sales to turn positive over the holidays. Perhaps so. This is a smartly-managed company with a great balance sheet in a business where a lot of small competitors have gone broke. But we don’t anticipate a huge rebound in consumer spending this Christmas, especially for the priciest baubles. Sales of what Tiffany calls “high-end statement jewelry” almost vanished into dust last year; they continue to be weak.

The bull case for Tiffany is that a rising stock market will bring the big spenders out again. An upbeat report this week from Citigroup Global Markets uses a 10-year chart to show how a rebound in the stock market is typically followed by a rebound in same-store sales. And a rebound in same-store sales, the report observes, is highly-correlated with gains in Tiffany’s share price.

But we’re in uncharted territory here. Home prices are still in the tank, and fear still in people’s hearts. A surge of conspicuous consumption this holiday season seems unlikely.

Indeed, a jewelry designer we know says that even his wealthiest private clients aren’t spending. And when they do, he adds, their wives sometimes return the pieces, saying they’re too extravagant.

That business will come back; it always does. But probably not this year.

Analysts expect Tiffany to earn $217 million, or $1.75 a share, in fiscal 2010 on revenue of $2.6 billion. In February the company’s shares were trading at a very un-Tiffany-like multiple of 11 times then-expected earnings for FY ’10. The stock’s median forward P/E multiple over the prior five years, we noted, was 20—which is exactly what the P/E is today.

That’s not to say that market exuberance won’t drive Tiffany’s shares to a more manic level. But the bigger risk now is to the downside.

Fleming Meeks is executive editor of Barron’s and the founding editor of Barron’s Daily Stock Alert. He previously served as editor of SmartMoney, The Wall Street Journal Magazine, and assistant managing editor of Barron’s. Meeks began his career in journalism 25 years ago as a staff writer for Forbes. He holds a B.A. degree from Windham College.If you have comments or questions, please contact him at fleming.meeks@barrons.com

David Englander is a staff writer for the Barron’s Daily Stock Alert. He joined in 2008 as a reporter. Prior to Barron’s, he worked as a consultant, advising Fortune 500 companies on growth strategies and mergers and acquisitions. He has also worked as an independent equity analyst. Englander holds a B.A. from Amherst College, an M.B.A. from the University of Rochester and an M.F.A. from Columbia University.If you have comments or questions, please contact him at david.englander@barrons.com

Alexander Eule has been a staff writer for Barron’s Daily Stock Alert since 2010 and a reporter for Barrons.com since 2006. Prior to the Stock Alert, Eule wrote the site’s Barron’s Take and Weekday Trader features, offering frequent insights into individual stocks and the broad market. He holds a B.A. from Columbia College and an M.S. in Journalism from Columbia University.If you have comments or questions, please contact him at alexander.eule@barrons.com